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Eurozone Job Market Cools, Putting Economic Recovery in Peril

A steady rise in employment has been one of the eurozone’s big successes over the past six years of economic expansion. But there are signs the region’s job market may be cooling as manufacturers cut back on hiring in response to weaker global demand for their exports.

That could place the eurozone’s already faltering recovery in peril, since it would lose the support of consumers at home just as it has lost buyers abroad.

For the European Central Bank, a softening job market might also kill off its already distant hopes of lifting inflation to its target of just below 2%. And for the many young people in southern Europe still without a job, it could blight their lifetime economic prospects.

Between the collapse of Lehman Brothers in September 2008 — when the financial crisis truly went global — and the eurozone’s return to economic growth in the second quarter of 2013, the currency area lost 6.7 million jobs, according to the European Union’s statistics agency.

By the time the ECB started to offer economic stimulus a little over a year later, in 2014, 2.3 million jobs had been recovered. And over the subsequent five years, a further eight million jobs were created. That means that overall, the eurozone has gained 3.6 million jobs since the beginning of the crisis — an accomplishment for an economic area that has struggled to provide work for its people over recent decades.

Looked at from another perspective, the eurozone has managed to lower its unemployment rate to 7.6% in May 2019 from a recent peak of 12.1% in 2013.

But more recently, there are signs that the long decline in unemployment is coming to an end. Purchasing managers at eurozone manufacturers reported cutting their payrolls in May and adding to them only slightly in June, responding to a long period of weakening new orders, particularly from abroad. As recently as the first quarter, manufacturers had expanded their payrolls by 1.3% from a year earlier.

“Companies are tightening their belts, cutting back on spending and hiring,” said Chris Williamson, chief business economist at IHS Market, a data firm that conducts the monthly survey of purchasing managers.

The ECB’s economists said recently they expect employment growth to slow this year, in “a delayed response to the weakness in activity in some countries.”

Germany is one of those countries, having suffered significantly from what has more recently become a global slowdown in manufacturing. That partly reflects its role as a supplier of tools and equipment to factories around the world, including China. Tensions between the U.S. and its largest trading partners have caused uncertainty about where to locate production to avoid new tariffs. That is weakening business investment around the world, according to the World Bank.

German manufacturers have responded by cutting back on hiring. They include robotics maker KUKA AG, which in March announced 350 job losses. Although service providers continue to thrive, retrenchment in manufacturing contributed to a May rise in Germany’s unemployment rate, the first in over five years.

Like Germany, The Netherlands has seen a sharp fall in unemployment over recent years as exports have boomed. But the government’s economic forecasters Wednesday said they now expect the unemployment rate to rise in 2020 as exports slow.

Other surveys point in the same direction, including a monthly poll by the European Commission that found hiring intentions at manufacturers were at their weakest in almost three years during May.

Without further declines in unemployment, Europe will be left with a number of big problems. While the eurozone’s unemployment rate has returned to its precrisis level, its job market is much changed.

There are much bigger differences now between the unemployment rates faced by the currency area’s 19 member countries, and particularly their younger workers.

Back in early 2008, Spain had the highest unemployment at 9.5%, while the Netherlands boasted the lowest at 3.6%. Eleven years later, the difference between the highest and lowest rates is two-and-a-half times wider. And that gap is widest among younger workers. While Germans under the age of 25 face a jobless rate of 5.6%, their Spanish, Italian and Greek counterparts have a one-in-three chance of being jobless.

If unemployment were to settle at current levels, that wouldn’t just leave a large slice of southern Europe’s youth without work — it would greatly reduce their prospects of ever finding any.

More immediately, a cooling job market would slow economic growth at a time when the currency area is already facing ebbing exports. Eurozone exports to the rest of the world fell 2.5% in April compared with March, the European Union’s statistics agency said Tuesday.

“The risks that have been prominent throughout the past year — in particular geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets — have not dissipated,” ECB President Mario Draghi said Tuesday. “The prolongation of risks has weighed on exports and in particular on manufacturing.”

Meantime, even with a first-quarter pickup in growth and consumer spending, inflation eased to 1.2% in May, well below the central bank’s target. Policy makers had hoped that a tightening jobs market would force businesses to raise their own prices to match higher wages.

But there is little evidence that is happening, and the window of opportunity could be closing.
Source: Dow Jones

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